The only way is up
01 April 2017
Asia-Pacific continues to lead global growth; excepting Japan, regional GDP should expand 5.5% in 2017, well above the world average of 2.9%. We expect regional growth to remain in the 5.5% range through the next five years. Japan’s GDP grew 1.0% in 2016, a pace that is likely to hold for 2017 and 2018. Chinese real GDP grew 6.7% in 2016, but growth has now slowed for six consecutive years. Expect continued slowing to 6.5% in 2017 and 6.2% in 2018 as excess industrial capacity, the housing glut and rising debt remain problematic. India has been slowed by cash shortages, but should return to 7% plus growth as economic reforms attract foreign investment in 2017. Over the medium term, Indian economic growth will easily outpace China (7.3% versus 6.0%).
While a slowing China has led to a lower expectation of construction growth, Asia-Pacific will lead global construction growth in 2017 with an anticipated 4.3% y/y increase. Global growth is expected to be 3.0%. The region will be led by Pakistan, the Philippines and Vietnam with infrastructure the driving force at 6.3% growth.
Japanese unemployment has fallen to 3.0%, yet wage growth is limited, restricting consumer spending and housing expenditures. A shrinking and aging population and work force compounds the problem and limits construction potential. While a fiscal stimulus package should provide some modest growth, high government debt limits the size of any public investment and may become a serious challenge in itself. Weak wage growth and consumer confidence could further weaken capital expenditure through lower corporate profits, although the yen is expected to depreciate over 2017.
Australian economic growth will remain around 2.5% for 2017 and 2018. Export performance is a risk for commodities such as iron ore or coal—despite Australia being a low-cost supplier—as China continues its transformation from heavy industry. Solid growth is achievable owing to new LNG capacity coming online and the possibility that Australian dollar depreciation will boost the competitiveness of manufacturers. While we expect gradual improvements in fixed investment, much of the near term effect stems from the reduced drag from mining investment, as the correction in new engineering construction nears its trough.
With a combination of fiscal and monetary stimulus measures, Indonesia’s economy expanded 5.0% in 2016. The economy should remain strong in 2017 with real GDP growth of 5.0%, before expanding 5.1% in 2018. Domestic demand and foreign investment will key growth. Households and businesses with the means to borrow will benefit from Bank Indonesia (BI)’s aggressive monetary policy easing during 2016, although lending rates remain high among regional peers. Private-sector investment will be bolstered by economic reforms introduced between late 2015 and early 2016; however, the uncertainty surrounding Brexit and US foreign and trade policies could act as constraints, especially on foreign investment.
The Philippine economy grew 6.8% in 2016, underscored by sizzling domestic demand, first bolstered by election-related spending and followed by a surge in infrastructure investment. Fixed investment was up 18.7% in the fourth quarter, propelled by a 26.2% surge in durable equipment and a 23% jump in public construction investment. Fixed investment will remain a driving force of growth. The government promises infrastructure spending to bolster growth, generate more jobs, and ease poverty.
Thailand’s economy is anticipated to expand 3.0% in 2017 due to increased fiscal stimulus, stable domestic politics, and favorable tourism revenues. Tourism will remain a bright spot as inbound tourists from China, Russia, and the United States continue to rise. Investment conditions should improve in the near term following the government’s ambitious public investment plans focusing on upgrading infrastructure, as well as a raft of tax breaks intended to revive private investment. The implementation of public investment projects will depend on political developments ahead of the general elections scheduled for early 2018. Meanwhile, private investment growth is likely to remain subdued against a backdrop of low capacity utilization and continued political and economic uncertainty.
Pakistan offers one of the strongest construction opportunities in the world as investment in the China Pakistan Economic Corridor (CPEC) will power growth for several years. CPEC is an ambitious plan to establish a trade link between Gwadar, Balochistan, in southern Pakistan, to Kashghar, Xinjiang, in western China. China plans to invest $45 billion in CPEC, intended to be fully operational by 2027. Infrastructure development features heavily in CPEC, including the construction of Gwadar International Airport, the Multan-Sukkur section of the Karachi-Lahore motorway, an upgrade package for the Karakoram Highway, and an elevated mass-transit system in Lahore. Chinese investment is heavily focused on Pakistan’s energy sector, with Beijing agreeing to construct coal-based power plants, hydropower plants, and other solar and wind energy parks. Of the total planned investment, nearly $34 billion will go to the energy sector to add more than 10,000 MW to Pakistan’s national grid.
Vietnam’s economy remains one of the brightest points in the region. Government efforts to simplify business registration regulations, including improvements in infrastructure, should stimulate investment spending, and the external sector will benefit from increasing foreign direct investment (FDI) and favourable wage differentials with manufacturing powerhouse China. Fixed investment will be on an uptrend, in line with the successful negotiation of many trade agreements in the last 18 months. A large labour force, a favourable geographical location, relatively low wages, and stable political conditions will support solid growth in manufacturing.
The risk/reward equation
The chart below puts these construction markets in the context of the region. The vertical axis represents the five year outlook for compound annual growth. The size of the bubble reflects the 2015 size of the construction market in real U.S. dollars. The horizontal axis reflects the risk of construction investment – a market basket of assessments including the ability to repatriate earnings, enforce a contract, protect a patent, deal with regulatory hurdles and obtain stable prices and labor relations. The risk score extends to 100. The cross-hairs represent global averages for construction market growth and risk
Much of the region falls into the lower left quadrant which features slower growth, but also relatively low risk or the upper right quadrant which features above average growth, but also higher risk. South Korea offers above average growth with below average risk. Indonesia, India and a band of smaller countries join China offering above average growth with higher risk.
In general, the outlook for Asian construction falls into two camps. Developed markets offer rather limited potential, although none are in recession, while emerging markets offer greater opportunity. Over the past two years, total construction growth potential has fallen, largely due to China.
Established in 1959, IHS is the leading source of information, insight and analytics in critical areas that shape today’s business landscape. Businesses and governments in more than 150 countries
around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed
and confidence. Headquartered in Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and employs about 8,800 people in 32 countries around the world.